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China To Invest $547 Billion From Personal Pension Funds Into Volatile Stock Markets


(BEIJING)  In a surprise move, China today allowed its $547 billion pension fund, the world’s largest, to be invested in its volatile stock market barely weeks after its biggest crash which wiped out about $four trillion capital between June and July.

The State Council, China’s cabinet published the final guideline on investment for the world’s second largest economy’s massive pension fund, effectively opening the gate for more diversified and riskier products.

The final plan, released after considering public opinion, allows the pension fund to be invested in new products, including domestic stock markets, but restricts the maximum proportion of investments in stocks and equities to 30 per cent of total net assets, state-run Xinhua news agency reported.

The fund will also be used to participate in major projects and purchase shares in state-owned enterprises to gain long-term yields, the report said.

The government defended the move saying it is intended to create more value for the massive fund, which was previously parked in banks or invested in treasury bonds with low yields, a condition that has long spurred calls for changes as China faces a huge challenge in caring for its increasing elderly population.

While pushing for diversified investments, the cabinet stressed an “active and cautious” approach in the process.

“The management of the funds must prioritise safety and firmly control risks,” it said.

China’s pension fund, which accounts for roughly 90 per cent of the country’s total social security fund pool, had net assets of 3.5 trillion yuan ($547 billion) in 2014.

The risky move came as after the recent sell-off which according to the official media reports wiped out $4 trillion in market value between June and July.

Following this, over 20 million small investors deserted the stock markets despite a series steps announced by the government to infuse confidence in the markets, which staged recovery of sorts amid infusion of capital by state-run financial institutions.

The move to permit pension funds also comes in the immediate backdrop of China devaluing its currency by about four per cent amid the economic slowdown.

The move was largely interpreted as an attempt to boost the sagging exports.

Some economists are linking the central bank’s move to China’s bid to get the yuan included in the Special Drawing Rights (SDR), international reserve currencies used by the International Monetary Fund (IMF).

An IMF forecast of Chinese economy said the world’s second largest economy will grow at 6.8 per cent, which is lower than the seven per cent target set by the government.

In its recent World Economic Outlook Update, the IMF forecast the Chinese economy to grow 6.3 per cent in 2016 and 6 per cent for 2017.